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The former CEO of Homestore.com was convicted, following a jury trial, of the crimes of "conspiracy, five counts of insider trading, three counts of filing false reports with the Securities and Exchange Commission, five counts of falsifying corporate records and four counts of lying to company auditors." (See Press Release here of USA Central District of California). The defense argued that CEO Stuart Wolff was not aware of improper deals. (see here) The ignorant CEO defense, as has been seen in some recent cases, was not successful here. The defense intends to appeal.

According to the USA's press release -

"Wolff and the other Homestore employees, some of whom cooperated and testified against Wolff as government witnesses, participated in a scheme to execute fraudulent "round-trip" transactions to artificially inflate Homestore's revenue in order to exceed Wall Street analysts' expectations. The evidence presented during the trial showed that Wolff knew that the transactions fraudulently generated a circular flow of money in which Homestore recognized its own cash as revenue and that Wolff participated in concealing the scheme from the company's auditors. Wolff misled investors and analysts about Homestore's true financial condition and used the September 11, 2001 terrorist attacks as a pretense for Homestore's financial decline. Wolff exercised stock options during the course of the fraudulent scheme, obtaining millions of dollars in proceeds, which formed the basis for the insider trading counts."

The sentencing is set for September 11th, and it sounds like the government will be asking the court for a hefty prison sentence. In their press release they state that " Homestore shareholders suffered losses of at least $100 million. . . " An interested question at sentencing will be whether outside sources caused these losses.

The Morning News in Arkansas reports here that Robert Hay, a former Wal-Mart executive, received a prison sentence of one day, six months supervised release and $3,000 fine. The plea was to three counts of wire fraud. One has to admit that this is a pretty light sentence, but then again his role was minimal in the events that led to this fraud. (See also Wal*MartWatch here) Obviously a key aspect of this plea agreement was cooperation. And Tom Coughlin, former Wal-Mart executive, has since plead guilty. (see here)

This case emphasizes the power of the prosecution. Prosecutors can offer "deals" that provide enormous benefits. Even when one knows that his or her role is minimal and there is the possibility of a "not guilty" of trial, they can't risk the trial. If convicted at trial the sentence would likely be significantly higher, as most judges follow the sentencing guidelines. With a plea and 5K1.1 motion, the accused has a sure thing - albeit a conviction.

The question is whether prosecutors should have this amount of power? With judges for the most part following the guidelines, those accused of crimes are left to cooperate with the government to secure the benefits even when they might be found not guilty if they risk a trial. Are we really providing a right to a jury trial? Should one be penalized greater just because they decide to exercise that right?

Dennis Kozlowski, the former CEO of Tyco who was found guilty in state court (NY) was given a fine and restitution of 167 million. (see here) Unlike others convicted of white collar crimes, like Bernard Ebbers, he and co-defendant Mark Swartz were ordered to immediately begin serving their time. (see here) The Wall Street Jrl reports here that Kozlowski is trying to sell his Nantucket Estate to raise money to pay this fine. He has it listed for 23 million, having paid 5 million for it in 1997. If he gets this amount one could say that this was a good investment.

While the government was busy subpoenaing the reporters who they thought may have leaked confidential Grand Jury secrecy material in the steroid investigation, they must have been surprised to find out that they themselves were the source of a leak. Adam Liptak in a wonderful NYTimes article here details how 8 pages that the government thought had been redacted from a document filed in court was actually available to the public. And the government response to this - well The San Francisco Chronicle notes here that the government calls this "an unfortunate error, one that we regret." Some thoughts here:

The government needs to improve on IT. That someone can simply copy/paste a redacted document into a word processing program and obtain the content is pretty frightening. Will everyone who received redacted items from the government by email be pulling up the documents today to see if the same works for these items? This is more than "an unfortunate error."

This gives us a clue into what types of things the government redacts. Defense attorneys have been known to receive documents with less than a line on a page because the entire page has been redacted by the government. Sometimes one has to wonder if all the items that were in fact redacted ought to have been - this allows us to judge the government redaction process.

Should this "glitch" be investigated and people indicted? It is more than ironic that the government was investigating leaks only to find that they are leaking. It kind of reminds you of the saying - People in glass houses shouldn't throw stones.

Grand Jury Secrecy is Important. It is important for the prosecution as it allows them to investigate without being subject to public oversight. It is also important for individuals, especially public figures - like sports figures and politicians, that they not be named until indictment (if there is one), as the mere mention of them being associated with a grand jury investigation can have a negative effect on their career. Leaks in grand jury secrecy cannot be tolerated.

Now if this were a corporation that had committed this misconduct, would someone from the government be looking to see if they had a proper corporate compliance program in place? So was someone monitoring the IT department?

Putting an indictment under seal will not be the answer for the government when they have an approaching statute of limitations.

Indicted one day before the running of the statute of limitations, the government decided to seal the indictment. They had superseding indictments over the next 21 months. The government argued in the Southern District of New York that the statute of limitations was tolled during the sealing of the indictment. A district court in the Southern District of New York, however, found that when the government could not show a legitimate reason for sealing the indictment, the case would be dismissed. United States v. Gigante, June 15, 2006. (2006 WL 1643111). See also Liberal Sealing Brings Dismissal, N.Y.L.J. (6-20-06).

The Senate Indian Affairs Committee issued a report here, dated June 22nd, that will likely be weekend reading for many. The Washington Post here reports on this Abramoff related report, a report that tells the story of some Washington DC lobbying and money lost by tribes. The article looks at what Rep. Ney said and what he may have known. The question will be - what will the DOJ do, if anything, with this report. Stay tuned.

The fallout from the Milberg Weiss indictment continues to spread as other firms seek to lure away its partners and a remnant formed by former name partner William Lerach is accused of being linked to the misconduct. An article in The Recorder (here) states that a San Francisco law firm is soliciting a number of Milberg Weiss partners to join it and, not surprisingly, bring along the securities class actions for which they are lead counsel. The Lerach Coughlin firm, which broke off from Milberg Weiss in 2004, is the object of a motion to exclude its proposed lead plaintiff in a securities class action because of the firm's potential involvement in the government's continuing investigation related to payments to representative plaintiffs before Milberg Weiss split up. The motion (here courtesy of the Securities Litigation Watch) states that appointment of Lerach Coughlin's proposed plaintiff would be "troubling, to say the least," and the competing lawyers are kind enough to attach a copy of the Milberg Weiss indictment -- as if it were unknown to the court. The lawyers offer their plaintiff to serve as the lead plaintiff and themselves as suitable counsel, showing that the competition remains fierce in the securities class action world. The indictment is barely a month old, and hardly a week goes by without a challenge to Milberg Weiss' (and now Lerach Coughlin's) representation in a case or partners announcing they are leaving the firm. The momentum is unlikely to slow down in the near future, and could pick up if cooperating witnesses (or a defendant) are able to link former firm leaders Melvyn Weiss or William Lerach to the alleged improper payments. (ph)

In federal criminal prosecutions, Rule 29 permits a defendant to ask a court to dismiss charges for lack of evidence (and sometimes on other grounds) during the trial and after a verdict. Under the federal rules, it is important to make the motion to preserve the argument for appeal that the government did not introduce sufficient evidence for a reasonable juror to convict; otherwise, a defendant is left arguing that the conviction was the result of "plain error," a very difficult standard to meet. The motion is rarely granted, and defense lawyers often file it after a conviction almost as an afterthought to preserve their sufficiency claim and as a vehicle to request a new trial if the judge is so inclined, although those are not granted very often either. Jeffrey Skilling filed a fairly mundane Rule 29 motion (available below courtesy of the Wall Street Journal Law Blog) that largely recites the elements of the crimes for which he was convicted and then asserts that the government's evidence was insufficient. Given how unlikely it is that U.S. District Judge Sim Lake will grant the motion, it is there more to meet the requirement of the Rule and allow the defense to raise the argument on appeal than with a real hope of success.

One aspect of the motion is of interest, however, related to Count 14 charging Skilling with securities fraud related to Enron's 1999 10-K, that gives a little insight into how the guilty plea of former Enron chief accounting office Richard Causey right before trial affected the defense. The government's evidence of fraud included the so-called "Global Galactic" memo handwritten by former Enron CFO Andrew Fastow and purportedly initialed by Richard Causey. Skilling claims that the government changed its theory of his liability by arguing that the indictment did not allege that he had any direct involvement with the memo but only through his coconspirator Causey, who apparently planned to question at trial whether the initials on the document were his. Once Causey entered a guilty plea to a single count of securities fraud, he was no longer available to dispute the authenticity of the document or question his connection to it. Right before trial, Judge Lake denied Skilling's motion to have an expert review the original of the memo to determine whether the initials really were Causey's, on the ground that the motion was untimely. At trial, Fastow testified that Skilling orally acknowledged the "Global Galactic" memo that set forth side deals (including the infamous Nigerian Barge transaction with Merrill Lynch) removing certain risks from Enron's balance sheet, the cornerstone of the government's securities fraud charge. According to Skilling's motion, this was a material variance from the indictment that misled him as to the importance of the "Global Galactic" memo because the indictment only charged him with liability as a conspirator and not as a participant in the transaction. Therefore, the denial of the motion to have an expert examine the document meant he had no effective defense to the government's evidence to support a different theory of liability.

Skilling's assertion likely signals one of the claims he will raise on appeal to have Count 14 overturned, and to support his argument that he was denied the right to present exculpatory evidence because the government named so many former Enron employees as unindicted coconspirators that they could not testify out of fear of being charged with crimes. An interesting question is why, if Skilling's lawyers really believed the initials of Causey were forged, the defense did not call him as a witness. It may be that the forensic examination is a red herring because Causey could have rebutted any expert testimony about the authenticity of the initials by affirming them on the witness stand, so the evidence would not have affected the outcome. It seems clear that the defense strategy before Causey's guilty plea was to make Fastow the focus of the case and raise questions about the authenticity of the only document close to being a contemporaneous "smoking gun." Once Causey switched sides, the defense was left with rebutting Fastow through cross-examination and the testimony of Skilling and Ken Lay, which did not appear to have much beneficial effect. The "Global Galactic" memo stood out as one of the few pieces of documentary evidence linking Skilling to improper accounting at Enron.

Whether the Causey initials issue is one worth raising on appeal is questionable, but at least it spiced up an otherwise dull motion designed almost exclusively to take the case to the next level. (ph)

Resume-padding is a problem in every industry, although it takes a certain amount of chutzpah to claim credentials one never achieved. If one is going to pad a resume, however, it might be a good idea to avoid embellishing your record when it involves a different branch of the same government where you once served. Jason Romain served for a bit over a year in the Air Force in the mid-1980s, and his record was undistinguished, to say the least, with a discharge as an "entry level separation" because he failed "to meet physical standards for enlistment." When he applied 13 years later for a position as a police officer with the Department of Veteran Affairs, his record showed four years of service, discharge as a senior airman, a purple heart and a medal for service in the Grenada invasion (remember how well that one went?). It may have taken a while (over six years), but the misstatements have caught up with Romain because he has been indicted in the Eastern District of Pennsylvania (here) on four charges. In addition to a Sec. 1001 charge for making a false statement and a charge of altering his military discharge papers, there are two counts for crimes I have never seen before: Sec. 702 for unauthorized wearing of an Air Force uniform, and Sec. 704 for unauthorized wearing of medal and ribbons (including in this count a Liberation of Kuwait ribbon). One can talk about dressing-up a resume, but actually putting on the uniform is something different. (ph)

The Tenth Circuit joined every other federal circuit aside from the Eighth Circuit in rejecting the "selective waiver" approach to the attorney-client privilege and work product protection, which means that documents provided to the government cannot be withheld on either a privilege or work product claim. The decision arises from the private securities fraud claims filed against Qwest Communications after the Department of Justice and the SEC began investigating the company when it disclosed in 2002 that there were substantial accounting problems. As part of that investigation, Qwest voluntarily turned over to the government more than 220,000 pages that were subject to privilege and work product claims. Qwest settled an SEC civil enforcement action in November 2004 by paying a $250 million penalty. In the consolidated securities class action, the plaintiffs demanded production of the documents turned over to the government, which the district court ordered.

In a mandamus action to the Tenth Circuit, In re Qwest Communications International Inc. Securities Litigation (here), Qwest argued that the court should adopt the selective waiver analysis from the Eighth Circuit decision in Diversified Industries v. Meredith, 572 F.2d 596 (8th Cir. 1977) (en banc), that would permit it to assert the attorney-client privilege and work product protection because it only intended to waive the privilege with regard to the government agencies and not private parties. The court noted that every other circuit has rejected that position with regard to waiver of the attorney-client privilege, and, aside from attorney opinion work product, the same result applied to general work product claims, including the Eighth Circuit. The court rejected the argument that a failure to recognize selective waiver in the current "culture of waiver" would result in less cooperation by corporations with law enforcement investigations, stating:

[H]aving considered the purposes behind the attorney-client privilege and the work-product doctrine as well as the reasoned opinions of the other circuits, we conclude the record in this case is not sufficient to justify adoption of a selective waiver doctrine as an exception to the general rules of waiver upon disclosure of protected material. Qwest advocates a rule that would preserve the protection of materials disclosed to federal agencies under agreements which purport to maintain the attorney-client privilege and work-product protection but do little to limit further disclosure by the government. The record does not establish a need for a rule of selective waiver to assure cooperation with law enforcement, to further the purposes of the attorney-client privilege or work-product doctrine, or to avoid unfairness to the disclosing party. Rather than a mere exception to the general rules of waiver, one could argue that Qwest seeks the substantial equivalent of an entirely new privilege, i.e., a government-investigation privilege. Regardless of characterization, however, the rule Qwest advocates would be a leap, not a natural, incremental next step in the common law development of privileges and protections. On this record, "[w]e are unwilling to embark the judiciary on a long and difficult journey to such an uncertain destination." Branzburg v. Hayes, 408 U.S. 665, 703 (1972).

The Tenth Circuit noted that adoption of a selective waiver provision is better left to Congress and the rulemaking committee of the Judicial Conference, which has proposed a new Evidence Rule 502(c) (here) on this issue, which if adopted will provide:

In a federal or state proceeding, a disclosure of a communication or information covered by the attorney-client privilege or work product protection — when made to a federal public office or agency in the exercise of its regulatory, investigative, or enforcement authority — does not operate as a waiver of the privilege or protection in favor of non-governmental persons or entities. The effect of disclosure to a state or local government agency, with respect to non-governmental persons or entities, is governed by applicable state law. Nothing in this rule limits or expands the authority of a government agency to disclose communications or information to other government agencies or as otherwise authorized or required by law.

Without selective waiver in this case, counsel for the plaintiffs now get to wade through a mountain of documents that Qwest will have to produce. (ph)

The Chicago Tribune, in an article by Rudolph Bush and Matt O'Connor, reports here that a mail fraud count was dismissed by the court when prosecutor's were unable to prove the "mailing" aspect of the charge. The dismissal comes at the close of the government's case in what has been termed the "City Hall Corruption" trial.

Mail fraud requires proof of a mailing, or the defendant causing it to be mailed. It is a hook that provides the federal jurisdiction to this crime. Because it is usually so easy for the government to prove, it sometimes gets overlooked. As part of the Violent Crime Control and Law Enforcement Act of 1994, Congress added to the mail fraud statute "or deposits or causes to be deposited any matter or thing whatever to be sent or delivered by any private or commercial interstate carrier." This addition allowed prosecutors to use mail fraud when the mailing was via private carriers like Federal Express.

But whatever the method of mailing be, it is still essential for the government to prove that there was a mailing.

Posted here is a recent discussion of the SEC Options Timing Probe. The LA Times here adds a new dimension to the discussion, by stating that "authorities confirmed that they also were looking into possible instances of so-called spring-loading." For a lesson on the terms being used here, check out Erik Lie's website here, where he defines springing-loading.

The bottom line may be whether insiders received an unfair benefit. Did they breach a fiduciary duty? Was there a deprivation of honest services? With broad federal statutes, this can be pretty frightening to those who lived obliviously in a pre-Sarbanes Oxley world. Is it a whole new game now? And will the government recognize the new arena and leave any improprieties found to shareholder or other civil lawsuits? Or will this become a criminal division matter? Stay tuned.

David Safavian, a former Bush administration official, was found guilty after a jury trial on four of the five counts charged against him. He was convicted of three counts of false statements and one count of obstruction of justice. (see Washington Post here). Safavian was a former business partner of Jack Abramoff. Abramoff has plead guilty and is cooperating with the government. Although Abramoff did not testify in this trial, Neil Volz did. Prior to Volz becoming a member of Abramoff's lobbying team, he served as a former senior aide to Rep. Robert W. Ney. (see here).

So where is this all going?

Obviously, for Safavian the ramifications of this conviction are clear - he will likely be serving jail time. With sentencing set for October 12th, it gives him and the government time to reconsider their relationship. The question will be whether Safavian joins the "Abramoff Club," and becomes a new cooperating witness for the government. One also has to wonder whether this conviction will be a message to those who are under investigation to work something out with the government.

A press release here of the US Attorneys Office for the Northern District of California reports that three gas traders pleaded guilty "to conspiracy to manipulate the price of a commodity in interstate commerce." The press release states that the three:

"admitted in their plea agreements that they conspired to report fictitious trades to an industry newsletter, Inside FERC, from approximately July 1, 2000, to November 1, 2000. They acknowledged reporting the fictitious trades in an attempt to skew the published index prices of natural gas in the direction that would benefit Mirant or Cinergy’s natural gas positions in the market."

The press release states that "[a]ll three defendants are no longer employed by Mirant or Cinergy, and all three have agreed to cooperate with the government in its ongoing investigation."

We looked at the sad story of Anthony Elgindy here, but the story became even sadder yesterday with his sentencing. According to the Wall Street Jrl here, Elgindy received a sentence of 11 years. He was convicted in January of 2005 of the crimes of racketeering, conspiracy and securities fraud. The 11 year sentence he received also includes a forfeiture of 1.5 million.

In a case decided yesterday by the United States Supreme Court, Davis v. Washington, Justice Scalia cited to the Second Circuit decision in the Martha Stewart case for the point, "[t]he solemnity of even an oral declaration of relevant past fact to an investigating officer is well enough established by the severe consequences that can attend a deliberate falsehood." Which case does this cite fit into - the 911 Crawford case.

Shredders seem to be causing some problems for individuals in both the corporate world and the government arena. The Chicago Tribune reports here of a witness testifying in the "City Hall" corruption trial telling how she used a shredder to destroy lists of "people seeking city jobs or promotions and their political sponsors."

This case has one similarity with a recent case that was heavily publicized - - the defense appears to be attacking the media as part of its presentation. (see here) For information on the Chicago "City Hall" corruption trial, see the Chicago Tribune here and here.

As identified in a St. Louis Post-Dispatch article and discussed in an earlier post (here), suspicious trading in Maverick Tube call options right before the company announced it agreed to be taken over at a 30%+ premium has triggered an SEC civil action for insider trading (complaint here). The purchaser is Tenaris S.A., a company headquartered in Luxembourg and controlled by a parent company in Argentina. And, not surprisingly, the trading comes from Argentina, with two sets of purchasers identified by the SEC as trading in Maverick Tube call options and stock during the relevant period. According to the SEC complaint, the two sets of defendants are the Cavalleros of Buenos Aires and the Millers, who list a permanent address of Buenos Aires and apparently reside in Uruguay.

The complaint does not set forth any connection between the various defendants (there are five individuals) and Tenaris, going with the geographic connection and the timing to assert "on information and belief" that they were in possession of material nonpublic information in breach of a duty of trust and confidence. The timing evidence certainly is striking, with each group purchasing large numbers of June 06 out-of-the-money call options less than ten days before they would expire worthless -- a very risky bet, or a sure thing if you know the deal is about to be announced. The defendants also purchased Maverick Tube common stock, transactions that were much less lucrative. On the call option trades, the Cavalleros had a profit of over $850,000 on a $55,000 investment, while the Millers' profits were over $220,000 on an investment of a little less than $20,000. If you annualize those investment gains, they make Warren Buffett look like a minor leaguer.

Typical of insider trading cases involving overseas defendants, the Commission obtained a Temporary Restraining Order and Asset Freeze (order here) to prevent the money from leaving the United States while the Enforcement Division continues its investigation. Each group of defendants traded through the overseas offices of U.S.-based brokerage firms (Merrill Lynch and Wachovia), so the funds were on deposit in this country after the execution of the sale orders at the time the SEC filed suit. The case will now move forward on an expedited discovery basis in which the Commission will try to identify the source of the material nonpublic information, if any. I would expect Tenaris to cooperate in the investigation because it hardly does the company any good to have the SEC angry at it while it tries to complete the purchase of a U.S. corporation whose shares are publicly traded.

As part of the SEC's discovery, the various defendants will be noticed for depositions in the United States, at which they can try to explain why their trading did not involve material nonpublic information. If they were to show up, however, they would likely risk an immediate arrest and criminal insider trading charges. The SEC case is being conducted out of its Chicago office, which means the U.S. Attorney's Office for the Northern District of Illinois likely would be involved on the criminal side, and somehow I expect U.S. Attorney Patrick Fitzgerald's securities/commodities group will be quite aggressive if given the chance. A default judgment in the SEC civil action is a real possibility, leaving over $1 million on the table. (ph)

A Los Angeles man is scheduled to plead guilty tomorrow to a three count criminal information for "misuse of a means of identification to violate federal law, misuse of a passport and criminal copyright infringement." According to a press release of the US Attorney for the Central District of California, an individual was caught taking pictures, using his cellphone, of the MCAT (Medical College Admissions Test). The press release states that:

"[t]he proctor attempted to confiscate the camera, but [the accused] was able to leave the test facility with the digital images in his possession. Because the integrity of the exam had been compromised, the makers of the MCAT were required to redesign the questions. As a result of the security breach, court documents allege, the Association of American Medical Colleges suffered losses of more than $100,000."

The individual was also accused of using a false passport and using false identification.